Stress Test Results: Most Banks Likely to Pass


Stress Test Results: Most Banks Likely to Pass

Is your bank broke? Probably not.

Consumers and investors have been waiting for weeks for the results of the Treasury Department’s “stress tests” of the nation’s 19 largest banks. And it won’t be until May 4 that we get definitive results. But a senior Administration official says the Treasury Department has indicated that there is substantial value in the banks tested and that there are no big shocks coming.

That likely means no big bank will be deemed too stressed to survive. The official says the Treasury does believe some of the banks will need additional capital to make them stronger, and in all likelihood the government will identify those banks.

The bank stress tests are considered one of the key components of Treasury Secretary Tim Geithner and President Barack Obama’s plan to fix the financial system. They are designed to determine which banks would fail and which would survive if the economy worsens, as some economists expect. But when they were announced in mid-February it was not clear what the government would do with the information collected. Would it shut down a troubled bank

At first, the Treasury Department said it might not release the specific bank results. Observers assumed that Treasury officials were nervous that if a bank failed the test customers and investors would flee. But in the past few weeks the Obama Administration has started to believe that the market is doing a good job of differentiating between good banks and problem banks, according to the Administration official. That belief, the official says, gives the Treasury the confidence that it can release individual results of the stress tests without disrupting the market, or unduly forcing a bank out of business.

It also means, if you have been following the financial crisis, you won’t be too surprised to find out which banks turn out to be stressed. Shares of Goldman Sachs, for instance, are only 40% off where they were a year ago. Citigroup’s shares are down 86%. The Administration official also says the Treasury Department may need to pump more money into the banks than it currently has left in its $700 billion financial-rescue fund. But the Treasury Department has no plans to ask for the money immediately.

Doug Elliott, a former investment banker and fellow at the Brookings Institution, says that he thinks releasing the results of the bank stress tests is the right move. “For the test to instill any additional confidence we are going to need to know the results,” he says. “It is going to be very hard for these companies to raise additional capital on their own. So whatever funds they need are going to come from the taxpayer. So we should know how much that is and who it is going to.”

The Administration source says that the stress tests have uncovered the fact that risk controls at major financial institutions, even those that haven’t failed, were much too loose. But the most surprising result from the stress tests and related discussions may be this: bankers continue to appear oblivious to the nation’s insistence that regulations be put in place to keep banks from ever again putting the economy at such risk. “I just don’t think they get it,” the official says, referring to bankers’ unwillingness to take responsibility for past behavior. “Bankers seem to have no understanding how much damage their actions have done to their and their bank’s reputation,” the official says.

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